Extending the Non-Probabilistic Model: Cycles and Crashes
The Epstein-Wilmott model from the previous two chapters gives us worst-case prices for interest rate products without assuming any probability distribution. But the basic version is, well, basic. It assumes rates move smoothly within bounds. Real interest rates jump. They follow cycles. They have a stochastic component that looks a lot like Brownian motion on short timescales. Chapter 70 adds bells and whistles to make the model more realistic while keeping its non-probabilistic spirit.